2018-03-23

Does Arizona Collect Estate Taxes?

Taxation on Wills and Trusts?

Part of wise estate planning is to understand laws concerning taxation of wills and trusts before you or your beneficiaries need to act on them. Phelps Law, serving Chandler, Mesa, Phoenix, Scottsdale, and Gilbert, has been helping clients with the ins and outs of estate planning for more than 40 years. We’ve guided many people in establishing the best plan for their financial portfolios. In this particular blog post, we’re taking the time to share about Arizona and its laws on estate taxes.

Currently, 14 states in America collect inheritance taxes, including Connecticut, New York, Hawaii, and Oregon. Even the District Of Columbia collects estate taxes. The good news for Arizona residences is that our sunny state is one of the remaining states that does not collect a state inheritance tax.

The Pick Up Tax

Arizona used to collect estate taxes through something called a pick up tax. A pick up tax means Arizona received a portion of the Federal taxes that were collected on estates. But the pick up tax was phased out as of January 1, 2005, through the Economic Growth and Tax Relief Reconciliation Act. And in 2006 the Arizona legislature voted to permanently do away with provisions in Arizona statutes that allowed for collection of estate taxes on a state level.

It is possible that the Federal government will at some point reinstate a pick up tax, which would allow states to once again collect estate taxes through Federal estate taxation. But as it stands now, even if the pick up tax is brought back, Arizona won’t be legally able to collect, unless the state legislature votes to reinstate it.

Inheritance Tax from Other States

However, if you’ve inherited property/assets in Arizona that were originally located in one of the fourteen states (and the District of Columbia) that collect inheritance taxes, it’s possible that you will owe estate taxes to that state.

Taxes on Income from the Estate

Paying no state inheritance tax is one of the benefits of living in Arizona. But be aware, there are some instances where you may need to pay income tax on your inheritance. Larger estates may end up paying Federal estate taxes. And in Arizona, if the estate earns income (e.g., through accrued interest or through stocks and bonds) between the time of the estate owner’s death and the closing of the estate, Federal and Arizona taxes may need to be paid by the estate on that income before distribution of the estate to the beneficiaries.

Two more comments on estates and paying income taxes; if you’re a beneficiary of a trust that did not pay income taxes (i.e., before you received your distribution), you’ll be responsible for any unpaid taxes. Inheriting money from a tax-deferred IRA is another situation where you’ll pay taxes on your inheritance.

If you’d like more information on taxation and estates, feel free to contact us at Phelps Law for a free consultation. Our experienced team has helped many Arizona clients create wills and trusts that can help avoid income taxation, save money, and protect assets. Let us know if we can help you.